Job order costs systems are often used by companies that manufacture custom products for customers or batches of similar products. A process cost system provides product costs for
each manufacturing department or process. Process cost systems are often used by companies that manufacture units of a product that are indistinguishable from each other and are manufactured using a continuous production process.
Job Order Cost Systems for Manufacturing Businesses
A job order cost system records and summarizes manufacturing costs by jobs. o o
While jobs are still in the production process, they are part of Work in Process Inventory. As jobs are completed, they become part of Finished Goods Inventory. When the finished goods are sold to customers, their costs become part of Cost of Goods Sold.
The storeroom releases materials to use in a job when a materials requisition is received. o
The materials requisitions for each job serve as the basis for recording materials used.
For direct materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job cost sheets make up the work in process subsidiary ledger. Materials requisitions are used as a basis for the journal entry recording the materials used. o
When employees report for work, they may use electronic badges, clock cards, or in-and-out cards to clock in. When employees work on an individual job, they use time tickets to record the amount of time they have worked on a specific job. A summary of the time tickets is used as the basis for the journal entry recording direct labor for the month. o
This entry increases (debits) Work in Process and increases (credits) Wages Payable.
Factory overhead costs cannot be identified with or traced to specific jobs. For this reason, factory overhead costs are allocated to jobs. The process by which factory overhead or other costs are assigned to a cost object, such as a job, is called cost allocation. o
The factory overhead costs are allocated to jobs using a common measure related to each job. This measure is called an activity base, allocation base, or activity driver such as direct labor hours, direct labor cost, or machine hours.
Factory overhead costs are normally allocated or applied to jobs using a predetermined factory overhead rate. The predetermined factory overhead rate is computed as: Estimated Total Factory Overhead Costs Predetermined Factory = Overhead Rate Estimated Activity Base
Applying Factory Overhead to Work in Process (slide 2 of 2)
Depending on whether actual overhead is greater or less than applied overhead, the factory overhead account will either have a debit or credit ending balance as follows: o
If the applied overhead is less than the actual overhead incurred, the factory overhead account will have a debit balance called underapplied factory overhead or underabsorbed factory overhead. If the applied overhead is more than the actual overhead incurred, the factory overhead account will have a credit balance called overapplied factory overhead or overabsorbed factory overhead.
A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs. The job cost sheets can be analyzed for possible reasons for increased materials cost if applicable.
Job Order Cost Systems for Professional Service Businesses (slide 1 of 2)
A job order cost accounting system may be used by a professional service business. o
For example, an advertising agency, an attorney, and a physician each provide services to individual customers, clients, or patients. In such cases, the customer, client, or patient can be viewed as a job for which costs are accumulated.
Job Order Cost Systems for Professional Service Businesses (slide 2 of 2)
• The primary product costs for a service business are direct labor and • •
overhead costs. Any materials or supplies are insignificant and are included as part of overhead costs. Like a manufacturing business, direct labor and overhead costs of rendering services to clients are accumulated in a work in process account. When the job is completed and the client billed, the costs are transferred to a cost of services account. o
Cost of Services is similar to the cost of merchandise sold account for a merchandising business or the cost of goods sold account for a manufacturing business.
• A finished goods account and related finished goods ledger are not necessary. o
This is because the revenues for the services are recorded only after the services are provided.